Libyan rebel forces in the Nafusa mountains, south-west of Tripoli, launched a major offensive against government positions in an attempt to capture the strategic town of Ghazaya.

Reports in opposition media said the rebel fighters had reached the outskirts of Ghazaya with heavy fighting involving tanks and artillery. The town is significant because it is close to the Tunisian border and is a base for government forces shelling roads leading over the border that are used by rebels to bring in supplies. "We have started attacking Ghazaya with rockets and tanks," a rebel spokesman, Mohammed Maylud, told Reuters.

A second town, Al Jawsh, was reportedly captured but then rebels were unable to hold it, despite deploying several tanks captured from forces loyal to Muammar Gaddafi.

Nafusa is a narrow chain of mountains running east into Libya which rebel fighters have dominated for more than a month. But, to date, their lightly armed forces have struggled to move off the high ground to capture important roads and towns they need to consolidate their position and pose a direct threat to Tripoli.

Radio reports from rebel sources said four fighters had been killed and 18 pro-Gaddafi soldiers captured. One injured pro-Gaddafi soldier, who gave his name as Hassan, told Reuters: "We don't want to keep fighting. Everybody is against us."

Guma el-Gamaty, the UK co-ordinator of the National Transitional Council (NTC), said he had spoken to military commanders who hoped to "retake and clear" several towns and villages in the mountain area within days. "That will be a strategic shift," he said, explaining that capture by the rebels would put the towns out of reach of Gaddafi forces' missiles.

He added: "The other strategic benefit of retaking these villages and towns is that it literally clears the way [from the Tunisian border down the coast towards Tripoli]."

Yesterday's offensive came amid confusion surrounding the rebels' military commander, Abdel Fatah Younis, who was reported to have been arrested and detained at a military base in Benghazi. The former interior minister, who served under Gaddafi until he defected in February, was reported to have been questioned over alleged links with the regime in Tripoli. That could not be confirmed.

Al-Jazeera television reported that rebel troops loyal to the general, had returned from the eastern front and were in the streets brandishing firearms and demanding his release.

As Libya approaches the Muslim holy month of Ramadan, there is little sign of an imminent resolution to the five-month conflict. Yesterday, el-Gamaty sought to play down any suggestion that the NTC would agree to a settlement that would see Gaddafi staying in the country – a proposal briefly floated in recent days by Britain and France, and by the rebel leader Mustafa Abdul-Jalil.

"I think we are coming to the end of all these silly political initiatives and all this talk about Gaddafi staying in Libya," said Gamaty. He added: "Will he be allowed to stay in Libya? Will he not be allowed? Will he resign? Will he not resign? All these political initiatives, if they are not based on Gaddafi and all his sons leaving power and leaving Libya, these are initiatives that are not even worth talking about."

The NTC received another diplomatic boost when Portugal followed the example of Britain and others by saying it had granted official recognition to the rebels. In a statement, the foreign ministry said it supported "the Libyan people's aspirations in the construction of a free and democratic society".

In London, a day after Hague announced the expulsion of all remaining Gaddafi regime diplomats from the Libyan People's Bureau, attention shifted to the financial consequences of the recognition.

Gamaty said he hoped all the £12bn-worth of Libyan assets frozen by Britain since the start of the conflict would be unblocked. Britain is to attempt to unfreeze some of the assets, running into the hundreds of millions of pounds, but the bulk is expected to remain blocked until Gaddafi falls.

"The NTC cannot run two-thirds of Libya on just a few hundred millions ... we need billions for that," said the UK's rebel co-ordinator. He insisted the money would be used for basic services and medical supplies in the war-torn nation, and not for the purchase of weapons. However observers have said that in practice this would be hard to regulate.